Windfall

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test123
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Joined: Mon Feb 22, 2016 9:35 am

Windfall

Post by test123 » Sat Nov 09, 2019 9:03 am

We have a 85k inheritance with no tax implications. Spouse and I are 2 and 5 years from full retirement. Retirement planning is on track. Emergency fund is in place. Any debt is interest free, except mortgage —190k principal at 2.8 APR (appx 300k equity). We’re Earmarking 15k for post retire travel in a 60 month 2.4 apr CD. SO-we have 70k to invest. My initial thought was to whack down the mortage principal by about 1/3 but i’m Patient enough to let the windfall grow. My second thought was to invest in 5 year 3.0 APR CD at navy federal CU . I opened an account but by the time the funds transferred in, the rate had dropped to 2.4 APR. Looking for suggestions on where to park $70k for 5 years that will at least beat my 2.8 APR mortage rate.

grettman
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Re: Windfall

Post by grettman » Sat Nov 09, 2019 9:09 am

If you are looking for risk free you will have to find a CD rate that is better than your mortgage after taxes.

Just do some research using google.

The amount of money you might be able to make will be negligible. If I was in your shoes, I would throw it at the mortgage and go into retirement debt free.

dbr
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Re: Windfall

Post by dbr » Sat Nov 09, 2019 9:09 am

A generic answer is to invest new money at the same asset allocation as existing money. If you had ended up $85k richer over time would you have changed how you invest? I think the same answer applies to setting aside money for travel or what your plan is for eventually paying off your mortgage.

This answer would change if 85K is a very large amount compared to your other investments, but I am assuming you total net worth is substantially larger than 85K.

alex_686
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Re: Windfall

Post by alex_686 » Sat Nov 09, 2019 9:11 am

That is a hard one. Mortgages ate negative bonds, and few bonds will get that rate, especially after tax.

So, here is a question, based on the assumption that you are maximizing your tax advantage space. This modest windfall increase your ability to take risk. Does increase wealth increase your willingness to take risk?

I ask because the only reasonable choice in this situation is to either invest in the stock market or pay down your mortgage. The stock market should beat the 3% over the next 5 years. Probably.

Topic Author
test123
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Re: Windfall

Post by test123 » Sat Nov 09, 2019 9:53 am

Thx for the speedy replies. I can’t find any CD with higher yields. The only option is a CU in pennslyvania but I’m guessing that rate will NOT be available by the time my account got set up.Yes- all of our tax advantaged accounts/options are maxed. Windfall is a about 5% of total of tax advantaged retire funds. I guess my inclination was to be more conservative with the 70k—to guarnatee a return that was more than mortgage rate, to retain flexAbility to break open the cd if cash was needed beyond EF.

stan1
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Re: Windfall

Post by stan1 » Sat Nov 09, 2019 10:01 am

test123 wrote:
Sat Nov 09, 2019 9:53 am
Windfall is a about 5% of total of tax advantaged retire funds. I guess my inclination was to be more conservative with the 70k—to guarnatee a return that was more than mortgage rate, to retain flexAbility to break open the cd if cash was needed beyond EF.
The amount is a small percentage of your net worth. Just put it against the mortgage. You mentioned Navy Federal so will many of your retirement living expenses be met with a military or civilian federal pension income?

Topic Author
test123
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Re: Windfall

Post by test123 » Sat Nov 09, 2019 11:09 am

I’m a veteran so was able to join NFCU easily. But the only reason I joined was to get the 3% CD that evaporated before I could get funds transferred. We will have a small FERS pension—vast majority of retirement will be 401k, HSA, IRA and cash.thx for post and advice.

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RickBoglehead
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Re: Windfall

Post by RickBoglehead » Sat Nov 09, 2019 11:13 am

test123 wrote:
Sat Nov 09, 2019 11:09 am
I’m a veteran so was able to join NFCU easily. But the only reason I joined was to get the 3% CD that evaporated before I could get funds transferred. We will have a small FERS pension—vast majority of retirement will be 401k, HSA, IRA and cash.thx for post and advice.
Unfortunate. Many banks let you open, then fund. Another option are banks that promise the highest rate in a certain amount of time, they'll adjust your rate. Ally's promise is 10 days.

I opened a bunch of Ally CDs a few months back, before the No Penalty Rate dropped below 2.3%. They were opened, but not funded, when the rate dropped to 2.2%. After 10 days, the rate was adjusted up to 2.3%, retroactively, per their guarantee.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

delamer
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Re: Windfall

Post by delamer » Sat Nov 09, 2019 11:16 am

test123 wrote:
Sat Nov 09, 2019 11:09 am
I’m a veteran so was able to join NFCU easily. But the only reason I joined was to get the 3% CD that evaporated before I could get funds transferred. We will have a small FERS pension—vast majority of retirement will be 401k, HSA, IRA and cash.thx for post and advice.
With no prepayment, when will your mortgage be paid off?

If you made the prepayment of $70,000, when would it be paid off? (You can find a mortgage calculator online.)

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Raymond
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Re: Windfall

Post by Raymond » Sat Nov 09, 2019 11:24 am

test123 wrote:
Sat Nov 09, 2019 9:03 am
...Any debt is interest free, except mortgage —190k principal at 2.8 APR (appx 300k equity)...
(emphasis added.)

What are the other (non-interest-charging) debts?
"Ritter, Tod und Teufel"

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ruralavalon
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Re: Windfall

Post by ruralavalon » Sat Nov 09, 2019 11:29 am

test123 wrote:
Sat Nov 09, 2019 9:03 am
We have a 85k inheritance with no tax implications. Spouse and I are 2 and 5 years from full retirement. Retirement planning is on track. Emergency fund is in place. Any debt is interest free, except mortgage —190k principal at 2.8 APR (appx 300k equity). We’re Earmarking 15k for post retire travel in a 60 month 2.4 apr CD. SO-we have 70k to invest. My initial thought was to whack down the mortage principal by about 1/3 but i’m Patient enough to let the windfall grow. My second thought was to invest in 5 year 3.0 APR CD at navy federal CU . I opened an account but by the time the funds transferred in, the rate had dropped to 2.4 APR. Looking for suggestions on where to park $70k for 5 years that will at least beat my 2.8 APR mortage rate.
test123 wrote:
Sat Nov 09, 2019 9:53 am
Thx for the speedy replies. I can’t find any CD with higher yields. The only option is a CU in pennslyvania but I’m guessing that rate will NOT be available by the time my account got set up.Yes- all of our tax advantaged accounts/options are maxed. Windfall is a about 5% of total of tax advantaged retire funds. I guess my inclination was to be more conservative with the 70k—to guarnatee a return that was more than mortgage rate, to retain flexAbility to break open the cd if cash was needed beyond EF.
test123 wrote:
Sat Nov 09, 2019 11:09 am
I’m a veteran so was able to join NFCU easily. But the only reason I joined was to get the 3% CD that evaporated before I could get funds transferred. We will have a small FERS pension—vast majority of retirement will be 401k, HSA, IRA and cash.thx for post and advice.
I suggest using the $70k to pay down the mortgage, try to go into retirement debt free.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Brianmcg321
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Re: Windfall

Post by Brianmcg321 » Sat Nov 09, 2019 11:31 am

I would invest it in a new mid engine corvette.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

kabob
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Re: Windfall

Post by kabob » Sat Nov 09, 2019 1:07 pm

ruralavalon wrote:
Sat Nov 09, 2019 11:29 am
I suggest using the $70k to pay down the mortgage, try to go into retirement debt free.
+1 - No Debt = True Freedom, Go for it...

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Wiggums
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Re: Windfall

Post by Wiggums » Sat Nov 09, 2019 1:18 pm

I do like that Ally will let you open the account and fund it second. That’s how I got 2.8%. Saw it on here, opened the account and figured out the funding the next day.

You have a great rate on your mortgage. But I’m also a fan of being debt free. If you are not comfortable being the money in the stock market and you can’t find anything that pays a decent rate, I’d pay down the mortgage. At least you know the money was well spent.

Topic Author
test123
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Re: Windfall

Post by test123 » Sun Nov 10, 2019 6:03 am

Mortage payoff in 10.3 years without prepay (15 year note).Non interest debt includes a car loan and a home improvement loan (HVAC system). Already have a fun / sports car. As I mentioned, my 1st inclination was to pay down the principal. A factor I didn’t mention is we will likely be moving when we enter retirement—hoping to downsize into a condo hopefully near grandkids. Right now leaning towards putting this in our vanguard brokerage.

itsjustme
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Re: Windfall

Post by itsjustme » Sun Nov 10, 2019 7:41 am

I was in a similar situation last year and bogleheads advised to pay down the mortgage. After lots of research on what the actual net difference between CD (or whatever you chose) and mortgage I found it to be not worth it. Paying down the mortgage is guaranteed savings and also comes with a lot of great feelings of being debt free. I went that route and don't regret it a single bit. Pay down your mortgage.

angelescrest
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Re: Windfall

Post by angelescrest » Sun Nov 10, 2019 7:54 am

itsjustme wrote:
Sun Nov 10, 2019 7:41 am
I was in a similar situation last year and bogleheads advised to pay down the mortgage. After lots of research on what the actual net difference between CD (or whatever you chose) and mortgage I found it to be not worth it. Paying down the mortgage is guaranteed savings and also comes with a lot of great feelings of being debt free. I went that route and don't regret it a single bit. Pay down your mortgage.
Right, but OP is saying they are already planning to downsize to a condo, which sounds like they won’t have a mortgage once they retire closer to family.

lakpr
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Re: Windfall

Post by lakpr » Sun Nov 10, 2019 8:52 am

test123 wrote:
Sun Nov 10, 2019 6:03 am
Mortage payoff in 10.3 years without prepay (15 year note).Non interest debt includes a car loan and a home improvement loan (HVAC system). Already have a fun / sports car. As I mentioned, my 1st inclination was to pay down the principal. A factor I didn’t mention is we will likely be moving when we enter retirement—hoping to downsize into a condo hopefully near grandkids. Right now leaning towards putting this in our vanguard brokerage.
I think a split in the middle might be warranted here. With a projected retirement within 5 years and contemplated move then, and given that is almost 50% of the time it would take for you to repay the mortgage completely at normal schedule, I would use 50% of the money to prepay mortgage and the rest 50% in equities in a brokerage account. You can think of the mortgage prepay as investing in a higher yielding bond whose duration matches your projected retirement horizon.

delamer
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Re: Windfall

Post by delamer » Mon Nov 11, 2019 11:19 am

With a likely move in 5 years, I’d invest the money rather than prepay the mortgage.

Liquid assets give you flexibility that a reduced mortgage doesn’t.

gips
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Re: Windfall

Post by gips » Mon Nov 11, 2019 11:55 am

It's really hard to make a suggestion without a complete picture of your finances. Does the money allow you or your spouse to retire a year earlier? I'd suggest using a mortgage calculator to see how a prepayment affects your payment. How much faster will you pay down your mortgage if you don't change your monthly payment amount?

We had a low-interest mortgage loan, we were making a little money every month with CDs versus the loan interest but were required to payoff off the mortgage loan at some point. As others have noted, the psychological impact of not having a mortgage far outweighs the financial impact.

good luck to you!

ps I've chased interest rates at around 10 credit unions and have never missed a rate. I wire the money, cost btw 0 and $20 and it arrives same day.
Last edited by gips on Mon Nov 11, 2019 12:05 pm, edited 1 time in total.

Chadnudj
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Re: Windfall

Post by Chadnudj » Mon Nov 11, 2019 12:04 pm

You mention you are 2-5 years from full retirement, and others have covered paying down mortgage/investing at your AA, etc.

But what about just saving this for some of those long-term big financial hits that you'll inevitably need to take/make at some point between now and retirement (or even within retirement)?

Things like:
- a new car (or new to you car to replace a current vehicle)
- a new roof
- a new furnace/AC
- new home windows/improved insulation
- other major home repairs
- any out-of-pocket medical costs/elective surgeries you've been delaying
- saving for a child's wedding (if you have any)
- saving for grandchildren's college (if you have/are likely to have any)

Having $70k around in a high-interest savings account or a money market account for some unexpected big expenses, even on top of your emergency fund, might be nice.....same with just spending the money now if you think your furnace might soon be in need of replacement, for instance (which might allow you to cut your heating bill a bit, too, adding to your "return" on this investment).

Good luck.

EDIT TO ADD: You mention potentially selling the house/downsizing to a condo. You might want to have a realtor/home inspector come through now to tell you what you might need to fix/replace/update to maximize your sale value on the home, and use the $70k to make those changes -- not only because you'll need to shell out for them eventually, but also so you get 2-5 years (or maybe more) of enjoying them yourself.
Last edited by Chadnudj on Mon Nov 11, 2019 12:08 pm, edited 1 time in total.

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willthrill81
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Re: Windfall

Post by willthrill81 » Mon Nov 11, 2019 12:04 pm

kabob wrote:
Sat Nov 09, 2019 1:07 pm
ruralavalon wrote:
Sat Nov 09, 2019 11:29 am
I suggest using the $70k to pay down the mortgage, try to go into retirement debt free.
+1 - No Debt = True Freedom, Go for it...
:thumbsup

Unless you can get guaranteed arbitrage on your mortgage (e.g. higher after-tax rate on a CD than your mortgage), retaining the mortgage in retirement increases your sequence of returns risk.

At current interest rates, paying off the mortgage and taking advantage of the guaranteed after-tax 2.8% return is probably the best route as long as he will retain adequate liquidity after doing so, keeping in mind that the need for liquidity will drop after the mortgage is paid off.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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